HWM Market Recap - August 2022
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My career in financial services started in June of 1981, a year that began with the inflation rate at approximately 12%. By the fall of 1982, the inflation rate had been cut in half, and in another two years, it was no longer a worsening problem. From there, the inflation genie remained in the bottle until the 2020s. I remember those days; I'm sure many of you do too. What can we learn from that history about the causes of inflation and how it can be reversed? Further, do those lessons apply to today's circumstances?
In 1966, the government dramatically increased spending on the Vietnam War and the "Great Society" War on Poverty. Federal outlays increased by double digits, and from 1973 to 1981, inflation averaged more than 9%. In addition, the federal government's share of the economy taken in taxes increased from 17% to over 19%. Throughout that period, the Federal Reserve expanded the money supply, or in economic terms, was 'accommodative.' This spending created 'excess demand' without increasing the supply of goods and services in the economy. In addition, the supply disruptions of the Arab oil embargo intensified the problem.
Beginning in early 1981, the government instituted policy changes to reduce inflation. These changes included: cutting the growth in spending, monetary tightening, reducing the regulatory burden, and lowering taxes to create incentives to work, save, and invest. As reported in the Wall Street Journal, "By 1984 runaway inflation was over, real GDP growth hit 7.2%, and it was 'Morning in America.' "
This brings us to the pandemic when, again, federal spending exploded, which the Federal Reserve accommodated by expanding the money supply at the fastest rate since WWII. Now, inflation is 9.1%, and as we discussed last month, a recession has either already begun or is in the offing. In addition, like in the 1970s, curtailed oil and natural gas supplies are making things worse. Recent legislation calls for excessive increases in taxes and spending, along with rapid and broad escalation in regulatory burdens on the economy. Meanwhile, the Fed remains accommodative, with current interest rates lower than the inflation rate. In short, the government is now implementing policies that are the opposite of those used to revive the economy and stop the inflation of the 70s and early 80s.
The historical pattern is as follows:
Money supply expansion leads to inflation.
The Federal Reserve raises interest rates.
Demand declines.
A recession ensues, causing layoffs.
The economy slows enough that the Fed decides to cut interest rates.
We are currently somewhere in the middle of this, and what happens next depends on the policies the government decides to pursue.
In the meantime, we remain cautious with healthy cash reserves while we wait for opportunities to reinvest and put the cash back to work.
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Monthly Changes in Major Indices
S&P 500: +6.69%
Dow Jones Industrial Average: +5.22%
Nasdaq Composite: +8.81%
Monthly Performance By Sector
Consumer Discretionary (XLY) +12.25%
Technology (XLK) +10.47%
Real Estate (XLRE) +7.50%
Industrial (XLI) +7.00%
Utilities (XLU) +5.79%
Consumer Staples (XLP) +4.73%
Health Care (XLV) +4.25%
Financials (XLF) +4.17%
Communication Services (XLC) +2.89%
Materials (XLB) +2.77%
Energy (XLE) -0.69%
Monthly Top 5 Performers
Consumer Discretionary (XLY) +12.25%
Consumer Discretionary jumped from the fourth-worst performing sector in June to the best in July. The leaders of the sector included: Lennar Corp (+22.77%), Tesla Inc (+20.73%), Chipotle Mexican Grill Inc (+19.40%), D.R. Horton Inc (+18.87%), and Ford Motor Co (+18.54%). In July, Amazon (AMZN) agreed to acquire primary care provider One Medical for $3.5 billion.
Technology (XLK) +10.47%
Technology had its first positive month since March. The leaders of the sector include: PayPal Holdings Inc (+19.55%), Fiserv Inc (+16.62%), Intuit Inc (+16.32%), Apple Inc (+14.49%), and Analog Devices Inc (+14.26%). In July, European Union lawmakers approved the Digital Services Act, causing sweeping new digital rules to keep tech giants such as Alphabet’s Google (GOOG/GOOGL), Apple (AAPL), Facebook (META), and Microsoft (MSFT) in check. The rules require online platforms to increase their policing of the internet for illegal content.
Real Estate (XLRE) +7.50%
Real Estate closed out the month of July as the third-best performing sector, with its leaders being: CBRE Group Inc (+15.31%), Alexandria Real Estate Equities Inc (+13.86%), Duke Realty Corp (+12.32%), Prologis Inc (+11.30%), Extra Space Storage Inc (+10.01%).
Industrials (XLI) +7.00%
Industrials had a strong month, with its leaders including: Boeing Co (+14.70%), Parker Hannifin Corp (+13.18%), Eaton Corp PLC (+13.10%), Cintas Corp (+13.06%), and Trane Technologies PLC (+12.78%). Roughly 2,500 Boeing (BA) workers were expected to go on strike at the beginning of August at three defense locations in the St. Louis area after they voted to reject a contract offer from the plane maker over retirement benefits and pay. Boeing averted the strike by offering a revised contract which the union ratified a few days later.
Utilities (XLU) +5.79%
With the fifth best-performing sector for July, Utilities had substantial gains in: NextEra Energy Inc (+10.60%), Sempra Energy (+9.02%), Atmos Energy Corp (+8.39%), CenterPoint Energy Inc (+8.28%), and Southern Co (+7.39%).
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It was the largest first-half of the year percentage drop ever for the Nasdaq, while the Dow plunged the most since 1962. Between January and the end of June, the S&P 500 fell 20.6%, the Nasdaq lost 29.5%, and the Dow declined 15.3%. All three indexes posted second-straight quarterly declines. The last time that happened was in 2015 for the S&P 500 and the Dow, and in 2016 for the Nasdaq. For the second quarter of 2022, the S&P 500 declined 16.4%, the Nasdaq lost 22.4%, and the Dow fell 11.2%. Bitcoin also posted its worst quarter since 2011 and its worst month ever in June.
The US Consumer Price Index (CPI) showed prices soared at an annual rate of 9.1% in June, up from 8.6% in May and more than the 8.8% economists had expected, marking the greatest 12-month increase for the index since November 1981. The rise was broad-based, with prices for gasoline and food contributing the most to the increase.
Rising automobile repossession rates will affect the broader U.S. economy. Data published in May by the New York Fed shows Americans’ auto debt rose to $1.47 trillion. That represents about a 10th of total consumer debt, which rose 8.2% since the end of the first quarter of 2022. So as not to flood the market with used vehicles, banks sell repossessed vehicles slowly, thus depressing prices. However, their inventory has grown so large that they have even resorted to leasing land to handle the surge in repossessed cars.
According to mortgage finance giant Freddie Mac, as of July 28th, the average rate on a 30-year fixed-rate mortgage is 5.30%. In July, rates had posted their largest weekly decline since December 2008 after hitting a 13-year high of 5.8% in June. That compares to a rate of 2.9% a year ago. Demand for mortgages is also falling as the number of mortgage applications declined to its lowest level since 2000, according to the Mortgage Bankers Association. Also, the percentage of canceled home purchase agreements in June reached its highest level since the start of the COVID-19 pandemic, as reduced competition and soaring interest rates led more buyers to back out. Online real estate brokerage Redfin (RDFN) reported that approximately 60,000 deals fell through in June, that being 14.9% of all those that had gone under contract during the month.
The average price of regular gas has declined 75 cents since it peaked at $5.01 per gallon in June. The new national average price of a gallon of gas as of 7/29/22 is $4.26, according to AAA. For the time being, the decline comes as crude oil prices continue to fall.
Shares of cruise lines jumped in July after the CDC ended its COVID-19 program for the cruise industry. Cruise lines can now make their own policies regarding vaccination, testing, and quarantine requirements.
The House of Representatives passed a bill to boost the computer chip industry. To strengthen the United States’ competitiveness and self-reliance in the semiconductor space, the House of Representatives passed the $280 billion CHIPS and Science Act of 2022, which would boost domestic semiconductor manufacturing and invest billions in science and technology innovation. The bill now goes to the president’s desk to be signed into law.
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About the Author
Holzberg Wealth Management is a family-owned and operated financial planning and investment management firm based in Marin County, CA. As your financial advisors, we serve you as a fiduciary and are fee-only, so we never receive commissions of any kind. We help individuals and families like you in the greater San Francisco Bay Area and virtually nationwide with the financial decision-making process to organize, grow, and protect your assets.
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